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March 2018

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Over the last ten-and-a-half weeks relentless spec and trade selling has pushed the December contract nearly 1700 points lower and it still remains to be seen where this decline ultimately leads to. From a technical perspective we are now approaching the June 2012 low of 66.10 on the weekly chart and beyond that we’ll have to go all the way back to October 2009 to find lower prices.

However, there is a glimmer of hope that we might at least get a rebound in the next week or two, since the market has been able to move sideways over the last five sessions, holding the low of 67.10 cents that was posted right after the release of the USDA report on July 11.

Although the USDA report offered plenty of shock value with its projection of 105.68 million bales in global ending stocks, the market is currently trading only slightly below its pre-report level, indicating that the brunt of the bearish news has already been discounted.

Taking a deeper look into the USDA numbers, one could even conclude that the market has been a bit too pessimistic lately. For example, the projected ROW surplus of 12.1 million bales in the coming season would actually be the lowest in four years. By comparison, in 2011/12 the ROW surplus amounted to over 27 million bales and in 2012/13 it was still over 17 million bales.

The reason the market is so bearish at the moment despite this relatively low ROW surplus is that China is not expected to absorb it to the degree it has in the past. Over the last 3 seasons the ROW surplus amounted to a combined 57.1 million bales and China imported a total of 58.4 million bales, absorbing the entire ROW surplus as well as some stocks.

This is not likely to happen again this season, as China is currently expected to import only 8.0 million of the 12.1 million bales the ROW produces in excess, which will result in ROW stocks growing by 3.75 million bales according to the USDA, from 39.67 million at the end of this season to 43.42 million at the end of 2014/15.

Considering that ROW ending stocks have been relatively tight in recent years, to the point that there was hardly any available cotton left at the end of summer, does a 3.75 million increase change the situation so dramatically that prices have to fall into an abyss?